Munich Personal RePEc Archive

Investment decisions, net present value and bounded rationality

Magni, Carlo Alberto (2007): Investment decisions, net present value and bounded rationality. Forthcoming in: Quantitative Finance

This is the latest version of this item.

[img]
Preview
PDF
MPRA_paper_13579.pdf

Download (208kB) | Preview

Abstract

TThe Net Present Value maximizing model has a respectable ancestry and is considered by most scholars a theoretically sound decision model. In real-life applications, decision makers use the NPV rule, but apply a subjectively determined hurdle rate, as opposed to the “correct” opportunity cost of capital. According to a heuristics-and-biases-program approach, this implies that the hurdle-rate rule is a biased heuristic. This work shows that the hurdle-rate rule may be interpreted as a fruitful strategy of bounded rationality, where several domain-specific and project-specific elements are integrated and condensed into an aspiration level. The paper also addresses the issue of a productive cooperation between bounded and unbounded rationality.

Available Versions of this Item

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.